Argo Group Reports Fourth Quarter and Full Year Results

HAMILTON, Bermuda–(BUSINESS WIRE)–Argo Group International Holdings, Ltd. (NYSE: ARGO) today announced
financial results for the three months and year ended December 31, 2018.

2018 Annual Recap

Gross Written

Combined

Net Income per

Adjusted Operating

Book Value

Premiums

Ratio

Diluted Share

Income Per Diluted

Per Share

Share (1)

$3.0B

97.9%

$1.83

$3.22

$51.43

↑ 9.6%

↓ 9.3 pts

↑ 28.9%

↑ $3.06 per share

↓1.8%(1)

from 2017

from 2017

from 2017

from 2017

from Dec. 31, 2017

“Our results in 2018 demonstrate the continued execution of our strategy
to optimize the efficiency of the platform, grow in lines with the most
profit potential and scale the business globally,” said Mark E. Watson
III, President and CEO. “Our business has been performing well against a
difficult market environment. We posted 9.6% growth in annual gross
written premiums including a 12.1 % rise in the U.S., improvements in
current year margins, and a 260 basis point improvement in the annual
expense ratio. While late year volatility in the investment markets
masked the full impact of our solid results, we believe we are well
positioned to continue to deliver strong shareholder value.”

HIGHLIGHTS FOR THE THREE MONTHS

HIGHLIGHTS FOR THE YEAR

ENDED DECEMBER 31, 2018

ENDED DECEMBER 31, 2018

●

Gross written premiums grew 15.8% to $702.0 million, compared
to $606.3 million for the 2017 fourth quarter.

U.S. Operations grew 12.1% to $426.8 million, compared to $380.9
million in the 2017 fourth quarter. The International Operations
grew 22.1% to $275.2 million, compared to $225.3 million for the
2017 fourth quarter.

U.S. Operations grew 12.1% to $1.7 billion, compared to $1.5
billion in 2017. The International Operations grew 6.4% to $1.3
billion, compared to $1.2 billion in 2017.

●

Net loss of $43.6 million or $1.29 per diluted share,
compared to net income of $28.9 million or $0.83 per diluted share
for the 2017 fourth quarter.

As noted in prior quarters of 2018, comparisons to 2017 are
impacted by the Company adopting a new accounting standard (refer
to the Notes below). As a result, the 2018 fourth quarter net
income was adversely impacted by an after-tax(2) loss
of $66.4 million (or a loss per diluted share of $1.96) related to
the change in fair value of equity securities. This loss was
included as a component of Net Realized Investment Gains and
Losses on the income statement.

In addition, the 2017 fourth quarter reflected a tax (and net
income) benefit of approximately $20.2 million related to the
revaluation of net deferred tax liabilities due to the reduction
of the U.S. Corporate tax rate from 35% to 21%.

●

Net income was $63.6 million or $1.83 per diluted share,
compared to net income of $50.3 million or $1.42 per diluted share
for 2017.

As noted in prior quarters of 2018, comparisons to 2017 are
impacted by the Company adopting a new accounting standard (refer
to the Notes below). As a result, 2018 was adversely impacted by
an after-tax(2) loss of $84.1 million (or a loss per
diluted share of $2.42) related to the change in fair value of
equity securities. This loss was included as a component of Net
Realized Investment Gains and Losses on the income statement.

●

Adjusted operating income(1)(2) was $18.8
million or $0.55 per diluted share, compared to adjusted operating
income of $0.3 million or $0.01 per diluted share for the 2017
fourth quarter.

●

Adjusted operating income(1)(2) was $111.7
million or $3.22 per diluted share, compared to adjusted operating
income of $5.5 million or $0.16 per diluted share for 2017.

●

The combined ratio was 99.5% compared to 106.7% for the 2017
fourth quarter. The loss and expense ratios for the 2018 quarter
were 62.0% and 37.5%, respectively, compared to 66.9% and 39.8%,
respectively, for the 2017 fourth quarter.

The 2018 fourth quarter expense ratio, excluding the effects of
net reinstatement and other CAT-related premium adjustments, was
36.7%, an improvement of 2.8 points compared to 39.5% for the 2017
fourth quarter. This improvement reflected lower acquisition costs
and the benefits of scale associated with an overall increase in
net earned premiums.

The current accident year, ex-CAT combined ratio was 95.6%
compared to 101.3% for the 2017 fourth quarter.

●

The combined ratio was 97.9% compared to 107.2% for 2017. The
loss and expense ratios for 2018 were 60.1% and 37.8%, respectively,
compared to 66.8% and 40.4%, respectively for 2017.

The 2018 expense ratio, excluding the effects of net reinstatement
and other CAT-related premium adjustments, was 37.6%, an
improvement of 2.4 points, compared to 40.0% for 2017. This
improvement reflected lower acquisition costs and the benefits of
scale associated with an overall increase in net earned premiums.

The current accident year, ex-CAT combined ratio was 95.4%
compared to 98.6% for 2017.

Net favorable prior-year reserve development was $13.9
million compared to favorable prior-year development of $12.6
million in the 2017 fourth quarter.

●

Net favorable prior-year reserve development was $18.0
million compared to net favorable prior-year development of $8.2
million in 2017.

●

Net investment income decreased 16.0% to $29.4 million
compared to $35.0 million in the 2017 fourth quarter.

Net investment income on the core portfolio increased 25.7% to
$30.3 million compared to $24.1 million in the 2017 fourth
quarter. This increase was primarily due to an increase in the
invested asset base and higher investment yields.

Alternative investments, which are reported on a lag, reported
losses of $0.9 million in the 2018 fourth quarter compared to
income of $10.9 million in the 2017 fourth quarter. This decline
was due to the volatility experienced in the securities markets
during the 2018 fourth quarter.

●

Net investment income decreased4.9% to $133.1
million, compared to $140.0 million in 2017.

Net investment income on the core portfolio increased 25.2% to
$113.3 million compared to $90.5 million in 2017. This increase
was primarily due to an increase in the invested asset base and
higher investment yields.

Alternative investments, which are reported on a lag, contributed
$19.8 million in 2018 compared to $49.5 million in 2017, a
decrease of 60.0%. This decline was due primarily to the
volatility experienced in the securities markets during the 2018
fourth quarter. In addition, the 2017 year included a net pre-tax
investment gain on Alternative investments of $12.2 million
relating to net asset sales initiated by an equity investee in the
second quarter of 2017.

●

Common stock repurchased by the Company during the 2018
fourth quarter totaled 29,893 shares for $1.7 million.

●

Common stock repurchased by the Company during 2018 totaled
530,882 shares for $31.7 million.

●

Book value per share was $51.43 at December 31, 2018 compared
to $53.46 at December 31, 2017.

Notes

●

Effective January 1, 2018, the Company adopted ASU No. 2016-01,
Financial Instruments: Recognition and Measurement of Financial
Assets and Liabilities, using a cumulative effect adjustment. This
adjustment transferred the unrealized gains and losses as of
December 31, 2017, net of tax, on equity securities from accumulated
other comprehensive income to retained earnings, resulting in no
overall impact to shareholders’ equity.

In accordance with this accounting standard, in the 2018 fourth
quarter, the Company recognized the change in the fair value of
its equity securities as a pre-tax loss of $83.0 million ($66.4
million net of taxes(2) or a loss of $1.96 per diluted
share). Since January 1, 2018, the Company recognized a pre-tax
loss of $105.1 million ($84.1 million after taxes(2) or
a loss of $2.42 per diluted share). These amounts are included as
a component of net realized investment gains and losses on the
income statement. Amounts for the comparable 2017 periods are not
presented as a component of net income, as ASU 2016-01 was
required to be adopted on a prospective basis.

●

Excluding repurchased shares, all references to common shares
associated with the recalculation of per share amounts for all
periods presented have been adjusted for the 15% stock dividend paid
on March 21, 2018, to shareholders of record at the close of
business on March 7, 2018.

●

All references to catastrophe losses are pre-tax.

●

Point impacts on the combined ratio are calculated as the difference
between the reported combined ratio and the combined ratio excluding
incurred catastrophe losses and associated reinstatement and other
catastrophe-related premium adjustments.

(1)

Refer to Non-GAAP Financial Measures below.

(2)

At assumed tax rate of 20%.

U.S. Operations

Gross written premiums in the 2018 fourth quarter of $426.8 million
were up $45.9 million or 12.1% compared to the 2017 fourth quarter.
Gross written premiums for 2018 of $1.7 billion were up $182.4 million
or 12.1% compared to 2017. Growth in both the quarter and full year
was achieved in all major lines of business, most notably Professional
lines (which grew 24.4% and 33.0% for the 2018 fourth quarter and
year, respectively, and Specialty Lines which grew 16.6% and 16.4% for
the 2018 fourth quarter and the year, respectively). These increases
reflected the continued execution of strategic growth and digital
initiatives, while still executing on appropriate risk selection and
exposure management actions.

Net retained premiums (net
written premiums as percentage of gross written premiums) for the
fourth quarter of 2018 was approximately 61%, compared to 68% for both
the first three quarters of 2018 and the full year 2017. The current
quarter decrease in the percentage of net premiums retained was due in
large part to an increase in ongoing strategic use of reinsurance
programs, as part of overall risk management initiatives, and to a
lesser extent, increased writings in fronted programs business.

Net earned premiums in the 2018 fourth quarter of $271.3 million were
up $27.6 million or 11.3% from the 2017 fourth quarter. Net earned
premiums for 2018 of $1.1 billion were up $142.3 million or 15.2% from
2017. The increase in both the quarter and annual net earned premiums
were driven by the aforementioned growth in gross written premiums.

The loss ratio for the 2018 fourth quarter was 59.0%, compared to
54.9% for the 2017 fourth quarter. The higher loss ratio in 2018
fourth quarter reflected increased catastrophe losses and a decline in
net favorable prior-year reserve development, partially offset by an
improvement of 2.9 points in the current accident year, ex-CAT loss
ratio.

The loss ratio for 2018 was 58.2%, compared to 56.4%
for 2017. The higher loss ratio in 2018 reflected a decline in the net
favorable prior-year reserve development, partially offset by a lower
catastrophe loss ratio. The current accident year ex-CAT loss ratio
for 2018 was 58.3%, compared to 58.4% for 2017.

The current accident year ex-CAT loss ratio for the 2018 fourth
quarter was 58.0%, compared to 60.9% for the 2017 fourth quarter. The
2.9 point improvement in the current accident year ex-CAT loss ratio
was driven in large part by a reduced level of non-catastrophe
related, discrete property losses in the 2018 fourth quarter compared
to the 2017 fourth quarter. The current accident year ex-CAT loss
ratio for 2018 was 58.3% which approximates the 2017 ratio of 58.4%.

Net favorable prior-year reserve development for the 2018 fourth
quarter was $6.0 million, compared to net favorable prior-year reserve
development of $10.0 million in 2017 fourth quarter. Net favorable
prior-year reserve development for 2018 was $20.8 million, compared to
net favorable prior-year reserve development of $38.7 million in 2017.
Both the quarter and annual net favorable prior-year reserve
development related primarily to Liability and Specialty lines.

Catastrophe losses incurred for the 2018 fourth quarter were $4.4
million. In addition, the 2018 fourth quarter was adversely impacted
by $7.7 million in outward CAT-related reinstatement premium
adjustments, resulting in a total catastrophe related impact of $12.1
million. Catastrophe losses in the 2017 fourth quarter reflected a net
benefit of $4.0 million, which included a reduction of $7.0 million
for third quarter 2017 events. Catastrophe losses in 2018, inclusive
of reinstatement premiums were $23.3 million, compared to $21.9
million in 2017.

The expense ratio for the 2018 fourth quarter was 33.0%, compared to
31.2% for the 2017 fourth quarter. As noted above, during the 2018
fourth quarter net earned premiums were reduced by $7.7 million for
outward CAT-related reinstatement premiums, which increased the
current quarter expense ratio. In addition, the 2017 fourth quarter
expenses included certain one-time compensation expense reductions. On
an adjusted basis, the expense ratio for the 2018 and 2017 fourth
quarters were 32.0 and 32.5%, respectively.

The expense
ratio for 2018 was 32.9%, compared to 34.1% for 2017. The 1.2 point
improvement in the annual expense ratio reflected the aforementioned
15.2% increase in net earned premiums and lower acquisition costs,
partially offset by continued strategic investments in people and
technology, including digital initiatives in support of premium growth.

Underwriting income for the 2018 fourth quarter was $21.7 million,
compared to $33.7 million for the 2017 fourth quarter. The $12.0
million decrease in underwriting income was primarily related to
higher catastrophe losses (a quarter over quarter increase in losses
of $16.1 million), and a decrease in net favorable prior-year reserve
development (a quarter over quarter net decrease in benefits of $4.0
million.

Underwriting income for 2018 was $95.9 million,
compared to $89.4 million for 2017. The $6.5 million increase in
underwriting income was due primarily to the benefits of scale related
to the $142.3 million increase in net earned premium. This increase
was partially offset by a decline in net favorable prior-year reserve
development of $17.9 million and to a lesser extent a $1.4 million
increase in catastrophe-related losses.

International Operations

Gross written premiums in the 2018 fourth quarter of $275.2 million
were up $49.9 million or 22.1% compared to the 2017 fourth quarter.
Gross written premiums for 2018 of $1.3 billion were up $75.4 million
or 6.4% compared to 2017.

The growth in the quarter was
achieved most notably in the Property (which grew $35.4 million or
67.7% compared to the 2017 fourth quarter) and Liability Lines (which
grew $12.8 million or 35.6% compared to the 2017 fourth quarter). The
increase in Property was primarily due to inward CAT-related
reinstatement premiums within our Reinsurance business and to a lesser
extent growth in Europe. As noted in prior quarters, offsetting the
aforementioned increases were reductions in gross written premiums
associated with the introduction of certain third party capital
beginning in 2018 (as part of the full integration of the reinsurance
business of Ariel Re that we acquired in 2017) and certain corrective
underwriting initiatives in Syndicate 1200. The increase in Liability
was also driven by growth in Europe and additional premiums reported
during the 2018 fourth quarter related to the 2017 Year of Account
(“YOA”).

The growth in 2018 was achieved in Property (which
grew $54.0 million or 12.2% compared to 2017), Liability (which grew
$31.1 million or 19.1% compared to 2017) and Professional (which grew
$20.5 million or 12.1% compared to 2017) lines, partially offset by
decreased writings within Specialty (which declined by $30.2 million
or 7.3% compared to 2017).

Net earned premiums in the 2018 fourth quarter of $181.1 increased
$20.2 million or 12.6% from the 2017 fourth quarter. This increase was
due primarily to premiums reported related to the 2017 YOA within
Syndicate 1200 and growth in net written premiums written. These
increases were partially offset by the reduced retained percentage of
certain of our Lloyd’s insurance and reinsurance businesses as noted
above. Net earned premiums in 2018 of $652.5 million increased $16.7
million or 2.6%.

The loss ratio for the 2018 fourth quarter was 66.0%, compared to
84.3% for the 2017 fourth quarter. The 18.3 point improvement in the
loss ratio was due to lower catastrophe losses, an increase in net
favorable prior-year reserve development, and a 2.9 point reduction in
the current accident year, ex-CAT loss ratio.

The loss
ratio for 2018 was 61.3%, compared to 79.4% for 2017. The lower loss
ratio in 2018 reflected lower catastrophe losses, net favorable
prior-year reserve development (compared to net unfavorable prior-year
reserve development in 2017), and a 1.8 point improvement in the
current accident year, ex-CAT loss ratio.

The current accident year ex-CAT loss ratio for the 2018 fourth
quarter was 60.4%, compared to 63.3% for the 2017 fourth quarter. In
connection with the acquisition and integration of Ariel Re (in
February 2017), the Company made a number of one-time catastrophe and
risk management reinsurance purchases in 2017. These 2017 purchases
reduced net earned premiums resulting in an increase in the 2017
fourth quarter loss ratio of approximately 3.6 points. The
improvements in the loss ratio also reflected the effects of remedial
underwriting actions undertaken in Syndicate 1200, most notably within
Property D&F business. Partially offsetting these improvements were a
number of discrete Marine and Energy losses incurred during the 2018
fourth quarter.

The current accident year ex-CAT loss ratio
for 2018 was 57.0%, compared to 58.8% for 2017. This improvement was
driven largely by the aforementioned CAT and risk management
reinsurance purchases in 2017 (which reduced net premiums earned in
2017), improvements in the Property D&F business within Syndicate
1200, partially offset by a number of discrete Marine and Energy
claims in 2018.

Net favorable prior-year reserve development for the 2018 fourth
quarter was $8.7 million, compared to net favorable prior-year reserve
development of $3.8 million in the 2017 fourth quarter. The 2018
fourth quarter net favorable prior-year reserve development was driven
primarily by assumed reinsurance losses related to various 2016 and
2017 catastrophe events.

Net favorable prior-year reserve
development for 2018 was $9.5 million, compared to net unfavorable
prior-year reserve development of $13.2 million for 2017. The 2018 net
favorable prior-year reserve development was driven primarily by
assumed reinsurance losses related to various 2016 and 2017
catastrophe events and professional lines, partially offset by
unfavorable development within Liability and Specialty lines.

Catastrophe losses incurred for the 2018 fourth quarter were $17.9
million. In addition, the 2018 fourth quarter was adversely impacted
by $1.7 million in net outward CAT-related reinstatement premium
adjustments, resulting in a total catastrophe related impact of $19.6
million.

Catastrophe losses incurred in the 2017 fourth
quarter were $36.1 million. In addition, the 2017 fourth quarter was
adversely impacted by net outward CAT-related premium adjustments of
$2.2 million. The total catastrophe impact on the 2017 fourth quarter
for these items was $38.3 million.

The expense ratio for the 2018 fourth quarter was 38.5%, compared to
36.3% for the 2017 fourth quarter. The increase in the expense ratio
relates to a 2.6 point increase in acquisition costs due to business
mix and certain commission adjustments recorded within the Reinsurance
business unit. On a year to date basis, the expense ratio for 2018
improved to 37.7% from to 38.1% in 2017.

The underwriting loss for the 2018 fourth quarter was $8.1 million,
compared to an underwriting loss of $33.1 million for the 2017 fourth
quarter. The $25.0 million improvement in underwriting income was
primarily related to lower catastrophe losses (a quarter over quarter
decrease in losses of $18.7 million), and an increase in the net
favorable prior-year reserve development (a quarter over quarter
increase of $4.9 million).

Underwriting income for 2018 was
$6.4 million, compared to an underwriting loss of $111.2 million for
2017. The $117.6 million increase in underwriting income was due
primarily to lower catastrophe losses (a year over year decrease in
CAT losses of $84.6 million), a $22.7 million change in net favorable
prior-year reserve development, a decrease in the CAY ex-CAT loss
ratio, and benefits of scale relating to the increase in net earned
premium.

CONFERENCE CALL

Argo Group management will conduct an investor conference call starting
at 10:00 a.m. EST (11:00 a.m. AST) tomorrow, Tuesday, February 12, 2019.
A live webcast of the conference call can be accessed by visiting https://services.choruscall.com/links/argo190212.html.
Participants in the U.S. can access the call by dialing (877) 291-5203.
Callers dialing from outside the U.S. can access the call by dialing
(412) 902-6610. Please ask the operator to be connected to the Argo
Group earnings call.

A webcast replay will be available shortly after the live conference
call and can be accessed at https://services.choruscall.com/ccforms/replay.html.
A telephone replay of the conference call will be available through
February 19, 2019, to callers in the U.S. by dialing (877) 344-7529
(conference # 10128196). Callers dialing from outside the U.S. can
access the telephone replay by dialing (412) 317-0088 (conference #
10128196).

ABOUT ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

Argo Group International Holdings, Ltd. (NYSE: ARGO) is an international
underwriter of specialty insurance and reinsurance products in the
property and casualty market. Argo Group offers a full line of products
and services designed to meet the unique coverage and claims handling
needs of businesses in two primary segments: U.S. Operations and
International Operations. Argo Group’s insurance subsidiaries are A.M.
Best-rated ‘A’ (Excellent) (third highest rating out of 16 rating
classifications) with a stable outlook, and Argo Group’s U.S. insurance
subsidiaries are Standard and Poor’s-rated ‘A-‘ (Strong) with a positive
outlook. More information on Argo Group and its subsidiaries is
available at www.argolimited.com.

FORWARD-LOOKING STATEMENTS

This press release may include forward-looking statements, both with
respect to Argo Group and its industry, that reflect our current views
with respect to future events and financial performance. These
statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words
such as “expect,” “intend,” “plan,” “believe,” “do not believe,” “aim,”
“project,” “anticipate,” “seek,” “will,” “likely,” “assume,” “estimate,”
“may,” “continue,” “guidance,” “objective,” “outlook,” “trends,”
“future,” “could,” “would,” “should,” “target,” “on track” and similar
expressions of a future or forward-looking nature.